Assignment 2

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University of Miami *

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300

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Economics

Date

Feb 20, 2024

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Uploaded by GrandValorGrouse43

Assignment 2: DCF Analysis – Mid-Michigan Manufacuring Inc. (MMMI) Mid-Michigan Manufacturing Inc. (MMMI) wishes to determine whether it would be advisable to replace an existing production machine with a new one. The have hired your firm as a consultant to determine whether the new machine should be purchased. The data you will need to make this determination is as follows:  MMMI has decided to set a project timeline of 4 years.  The new machine will cost $1,100,000. It will be depreciated (straight line) over a five-year period (its estimated useful life), assuming a book value of $100,000 at the end of its estimated useful life, i.e. at the end of Year 5.  The old machine, which has been fully depreciated, could be sold today for $253,165. The company has received a firm offer for the machine from Williamston Widgets, and will sell it only if they purchase the new machine.  Additional Sales generated by the superior products made by the new machine would be $665,000 in Year 1. In Years 2 & 3 sales are projected to grow by 8.5% per year. However, in Year 4, sales are expected to decline by 5% as the market starts to become saturated.  Total expenses have been estimated at 60.75% of Sales.  The firm is in the 21% marginal tax bracket and requires a minimum return on the replacement decision of 9%.  A representative from Stockbridge Sprockets has told MMMI that they will buy the machine from them at the end of the project (the end of Year 4) for $100,000. MMMI has decided to include this in the terminal value of the project.  The project will require $100,000 in Net Working Capital, 54% of which will be recovered at the end of the project. Please calculate NPV and IRR for this project. What is the operating cash flow for the first year?

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